The L funds are a very popular choice especially now that they are the default investment for new employees.
Consequently, a question that I get all the time is, “Which L fund is the best?”
While there is certainly not a “Best” option, there are dramatic pros and cons between the different L funds.
Here is a list of the current L funds:
- L Income
- L 2025
- L 2030
- L 2035
- L 2040
- L 2045
- L 2050
- L 2055
- L 2060
- L 2065
L Fund Basics
The first thing to understand when investing in the L funds is what they are designed to do.
In essence, the L funds are not unique funds but are simply a mixture of the 5 core funds (C, S, I, F, and G).
The TSP created the L funds in an effort to simplify investment decisions for federal employees. Many feds who were unfamiliar with the 5 core funds struggled to know which mix they should use.
The idea is that federal employees can simply put their entire TSP balance into the L fund that is closest to their projected retirement date and then leave it for a long time and as time goes on, the L funds automatically invest themselves more conservatively as people approach retirement.
As the target date for each fund is passed, it becomes the L Income fund. This just happened to the L 2020 fund.
For example, if John Smith was planning to retire in 2035, he’d invest his entire TSP in the L 2035 fund and let it ride. Over the next 15 years, the L 2035 fund would slowly become more conservative (more G and F fund) until it became the L Income fund.
So Which is The Best?
If someone is looking for the L fund that has the potential to earn the most over time, it will always be the one with the furthest target date. Right now, that would be the L 2065 fund. But this will also be the L fund that has the most volatility.
As of October 2020, the L 2065 was split up like this:
- G Fund: 0.35%
- F Fund: 0.65%
- C Fund: 48.77%
- S Fund: 15.58%
- I Fund: 34.65%
As you can see, this fund has very little G and F in it. It is meant for those federal employees that have a long-time time horizon.
The L Income fund is on the other side of the spectrum and is very conservative. Here is the allocation for the L Income fund as of October 2020:
- G Fund: 71.92%
- F Fund: 5.83%
- C Fund: 11.60%
- S Fund: 2.86%
- I Fund: 7.79%
Since most of the L Income fund is in the G fund, this fund is very unlikely to lose money. That being said, this fund is also very unlikely to earn much over time.
Retirees especially will want to find a balance between being too conservative or too risky so that they don’t outlive their money but they also can make it through the next market downturn.
The L funds can be a great tool for many federal employees. The most important thing is that you understand what the L funds are going to do over time and to make sure that it makes sense for you now and in the future.